Effect Of Central Bank Independence Research Articles

Consecutive decentralization: The effect of central bank independence on capital account liberalization

AbstractCentral bank independence (CBI) has been widely advocated as a means to address the time‐inconsistency problem of controlling inflation. Consequently, many countries have embraced central bank reforms since the 1990s. While extant research in political science has sought to unveil the consequences of CBI, there remains an unexplained variation in the response of countries with regard to capital account openness. Notably, a positive association exists between CBI and capital account openness due to the constraints CBI places on leaders' discretionary monetary and fiscal policies, thereby fostering reliance on financial policy to boost their economies. However, this relationship is contingent on the domestic political contexts of countries. CBI leads to capital account liberalization only when the rule of law is guaranteed, given that CBI is often stipulated by laws. Therefore, in countries where political leaders can easily override formal rules, CBI shows no discernible impact on capital account openness. Employing two‐way fixed‐effects and error‐correction models, the study reveals that CBI increases capital account openness only in democracies, in the presence of multiple veto players, and a high level of transparency. The findings underscore the pivotal role of the domestic political environment in analyzing how CBI constrains political leaders.

Harnessing the synergies of independent central banks and human capital for enhanced financial sector development in Africa

Using panel data from 2004 to 2012, we employ a two-step system GMM estimation technique, with robust standard errors, collapsed instruments and illus-trate marginal effects of central bank independence on financial development in Africa. We also examine the moderating roles of human capital, proxied by literacy rates on the CBI-financial development nexus. We find that, in countries with higher literacy rates/human capital, the positive impact of dejure CBI on financial development is enhanced. Higher literacy rates however, worsen the negative impact of de facto CBO on financial devel-opment. Independent central banks can be made more effective in achieving financial development through governments improving literacy rates. The study is the first to empirically examine the impact of central bank independence on financial development using both dejure and de facto CBI measures and literacy rates in explaining this relationship

Heterogeneity Effect of Central Bank Independence on Inflation in Developing Countries

This research investigates the relationship between central bank independence and inflation for 37 developing countries during the period from 1972 to 2019. Given that most developing countries experienced high inflation, many opted for central bank independence to enhance their focus on inflation. Central bank independence reforms were anticipated to create a higher level of independence, which would result in a low inflation rate. We employed pooled least square with the assumption of homogeneity of co-efficients; the result showed no significant relationship between central bank independence and inflation. We checked the homogeneity assumption of the panel by applying Chow and Roy–Zellner tests; results showed that the model was not homogeneous. Furthermore, we performed the panel heterogeneity model with the pooled mean group estimator which indicated that a reverse relationship exists between central bank independence and inflation. This finding is robust as we split the sample into two groups: moderate and high inflation countries; the negative relationship between those variables still exists.

Estimating the effect of central bank independence on inflation using longitudinal targeted maximum likelihood estimation

Abstract The notion that an independent central bank reduces a country’s inflation is a controversial hypothesis. To date, it has not been possible to satisfactorily answer this question because the complex macroeconomic structure that gives rise to the data has not been adequately incorporated into statistical analyses. We develop a causal model that summarizes the economic process of inflation. Based on this causal model and recent data, we discuss and identify the assumptions under which the effect of central bank independence on inflation can be identified and estimated. Given these and alternative assumptions, we estimate this effect using modern doubly robust effect estimators, i.e., longitudinal targeted maximum likelihood estimators. The estimation procedure incorporates machine learning algorithms and is tailored to address the challenges associated with complex longitudinal macroeconomic data. We do not find strong support for the hypothesis that having an independent central bank for a long period of time necessarily lowers inflation. Simulation studies evaluate the sensitivity of the proposed methods in complex settings when certain assumptions are violated and highlight the importance of working with appropriate learning algorithms for estimation.

Heterogeneity Effect of Central Bank Independence on Asset Prices: Evidence from Selected Developing Countries

Heterogeneity Effect of Central Bank Independence on Asset Prices: Evidence from Selected Developing Countries

The Side Effects of Central Bank Independence

AbstractCentral bank independence (CBI) solves the time inconsistency problem faced by policymakers with respect to monetary policy. However, it does not solve their underlying incentives to manipulate the economy for political gains. Unable to use monetary policy, and often limited in their ability to use fiscal spending, governments can resort to financial deregulation to generate short‐term political benefits. We show qualitatively and quantitatively that governments systematically weaken financial regulations in the aftermath of CBI, and that the effect of CBI is separate from an ideological shift toward liberalization. Our findings suggest that the growing financialization of the economy experienced by many countries over the last few decades is partly a by‐product of central bank independence.

Central Bank Independence and Systemic Stability of the Banking Sector

This study investigates the relationship between central bank independence and financial stability in a global sample covering 56 countries from 1980 to 2012. We find strong and robust evidence that central bank independence and its four dimensions (personnel independence, financial independence, policy independence, and central bank objectives) are negatively associated with bank systemic risk. Besides, the results indicate that the reductive effect of central bank independence on systemic risk is more pronounced during actual episodes of banking crises. Moreover, our results suggest that the democratic environment plays a vital role in moderating the central bank independence−systemic risk nexus.

Impact of central bank independence and transparency on international equity portfolio allocation: A cross-country analysis

In this study, we analyse the effects of central bank independence (CBI) and central bank transparency (CBT) and their interactions with institutional quality on foreign equity portfolio inflows. Employing a dataset from 42 countries over the period from 2001 to 2014, we find strong evidence that independent and transparent central bank has a positive and significant influence on foreign equity investment inflows. Further analysis shows that institutional quality interacts with central bank independence and transparency in attracting foreign equity portfolio. Our results are robust to alternative specifications, endogeneity concerns and that economic policy uncertainty increases asymmetric information and deters foreign equity portfolio investment inflows.

Causality Relationship between Central Bank Reforms and Inflation: Evidence from Developing Countries

This study provides evidence on the relationship between central bank reforms and inflation dynamics in a sample of 37 developing countries. We use panel structural break test and Granger non‐causality tests on annual inflation and the legal index of central bank independence (CBI), as a proxy of central bank reform, over 40 years period. The empirical results indicate a positive effect of central bank independence on inflation stabilization. Besides, we find that there exists bi-directional causality between central bank reforms and inflation. These findings suggest that central bank independence is beneficial in terms of sustained macroeconomic stabilization and should harness among developing countries. In particular, reforms should design to give central banks more autonomy in the conduct of monetary policy and financial sector regulation. JEL Classifications: E31, E58How to Cite:Anwar, C. J., & Nicholas, O. (2020). Causality Relationship Between Central Bank Reforms and Inflation: Evidence from Developing Countries. Signifikan: Jurnal Ilmu Ekonomi, Vol. 9(1), 15-30. doi: http://dx.doi.org/10.15408/sjie.v9i1.10955.

The limits of central bank independence for inflation performance

The independence of the central bank is routinely regarded as sacrosanct, at least for governments wishing to maintain credible monetary policy to meet inflation objectives. Yet empirical efforts to ascertain that routine economic policy advice are complicated by the endogeneity of inflation and independence. Using a large panel of up to 147 economies between 1970 and 2012, we revisit the claim that central bank independence leads to superior inflation outcomes from the perspective of democratic governance. We deploy a measure of the degree of democratic representation as an instrument for the independence of the monetary authority and obtain estimates of the causal effect of central bank independence on inflation. Our baseline results overturn the standard negative inflation-independence relationship. Further inquiry into parameter heterogeneity indicates that the result is driven by developing economies and is attributable to political-economy factors: insufficient transparency enables the pursuit of non-price-stabilization objectives.

Increasing public debt and the role of central bank independence for debt maturities

Governments are interested in lengthening debt maturity to reduce fiscal, refinancing, and default risks. On the other hand, investors may worry that highly indebted governments will inflate away their debts when it is long-term. Based on a new panel dataset spanning from 1990–2016 for 28 OECD countries, the paper finds that governments prolong the average debt maturity, if debt ratios increase. Interestingly, the marginal effect of the debt ratio on average maturity is higher for countries with an independent central bank than for countries with a more politically dependent one. There are two possible explanations for this effect of central bank independence. First, an independent central bank reduces the inflation risk premium that longer maturities otherwise would have. Second, governments with independent central banks are unable to use monetary policy for inflating and reducing fiscal and interest rate shock burdens. Again, this calls for longer maturities to reduce the relevant risks.

More effective than we thought: Central bank independence and inflation in developing countries

This study examines the effect of legal central bank independence on inflation in developing countries. In spite of the policy consensus suggesting that central bank independence is an effective tool to control inflation, the evidence is still limited, particularly for developing countries. Using a novel dataset, we analyze the effect of central bank independence on inflation for a sample of 118 developing countries between 1980 and 2013. We find that higher central bank independence is associated with lower inflation rates. This effect on inflation is stronger the more democratic a country is, but it is also present in non-democratic countries. Our results are robust to different specifications and methodologies. Furthermore, we find that all dimensions included in the measurement of central bank independence (objectives, personnel, policy, and financial independence) contribute to curb inflation. Our results shed light on which types of reforms may be more effective at fighting inflation in developing countries.

The Risk-Taking Channel of Monetary Policy: Do Macroprudential Regulation and Central Bank Independence Influence the Transmission of Interest Rates?

This study focuses on the risk-taking channel of monetary policy and its interaction with a supervisory-independence channel for commercial banks from Central and Eastern Europe, during the 2005-2011 period. Our results support the existence of an inverse relationship between expansionary monetary policy and bank risk-taking, meaning that very low interest rates lead to higher bank risk-taking. Also, our results show that the tight macroprudential regulation framework mitigates the negative impact of low rates. Furthermore, we show that central bank independence exert the same beneficial effect on the bank risk-taking channel because results show a dampening effect of central bank independence on the relation between expansionary monetary policy and bank risk-taking. Moreover, our results demonstrate that the risk-taking channel of monetary policy is even stronger in times of financial crisis.

Central Bank Independence and Inflation in Transition Economies: A Comparative Meta-Analysis with Developed and Developing Economies

This article empirically examines the effect of central bank independence (CBI) on inflation by means of a comparative meta-analysis of studies of transition economies and of other developed and developing economies. The results of a meta-synthesis indicate that both transition and nontransition studies have successfully identified a negative relationship between CBI and inflation. Moreover, the present meta-regression analysis suggests that a series of study conditions strongly affected the empirical results concerning transition economies. The article also finds that no significant difference exists between the two types of studies in terms of either effect size or statistical significance.

Central Bank Independence in the World: A New Data Set

ABSTRACTThis article introduces the most comprehensive dataset on de jure central bank independence (CBI), including yearly data from 182 countries between 1970 and 2012. The dataset identifies statutory reforms affecting CBI, their direction, and the attributes necessary to build the Cukierman, Webb and Neyapty index. Previous datasets focused on developed countries, and included non-representative samples of developing countries. This dataset’s substantially broader coverage has important implications. First, it challenges the conventional wisdom about central bank reforms in the world, revealing CBI increases and restrictions in decades and regions previously considered barely affected by reforms. Second, the inclusion of almost 100 countries usually overlooked in previous studies suggests that the sample selection may have substantially affected results. Simple analyses show that the associations between CBI and inflation, unemployment or growth are very sensitive to sample selection. Finally, the dataset identifies numerous CBI decreases (restrictions), whereas previous datasets mostly look at CBI increases. These data’s coverage not only allows researchers to test competing explanations of the determinants and effects of CBI in a global sample, but it also provides a useful instrument for cross-national studies in diverse fields, such as liberalization, diffusion, political institutions, democratization, or responses to financial crises.

Monetary Policy and Inclusive Growth: How Costly are Disinflations to Inclusion in Nigeria?

This paper estimates the cost of disinflation to inclusive growth in Nigeria using quarterly data for the period 1960q1 – 2015q2. Two alternative methodologies are used to estimate the size of the cost of disinflation to inclusive growth in Nigeria. The paper also estimates the effect of central bank independence on the size of this cost. It was found that the cost of disinflation to output and unemployment and, hence, to inclusive growth is small during the sample period. In the period following central bank’s independence, however, the cost of disinflation had fallen to zero. The paper, therefore, concludes that the contractionary monetary policy that disinflations necessitate have very small effects on the inclusiveness of growth in Nigeria. In fact, such costs are nearly non-existent in the last few years. One implication of this finding is that the Central Bank of Nigeria may have little to fear in terms of potential costs of disinflation to inclusive growth, especially through its effect on output and unemployment.

Central bank independence, financial supervision structure and bank soundness: An empirical analysis around the crisis

Abstract Over the last fifteen years, many countries introduced reforms into the supervisory architecture of their financial sector. However, there is no evidence on whether specific supervisory arrangements were more successful than others during the crisis. Empirical evidence on the topic is in general scarce and there are reasonable theoretical arguments for and against alternative approaches. Similarly, while the effect of central bank independence on price stability has attracted a lot of attention, our knowledge with regards to its effect on bank soundness remains limited. Using a large sample of commercial banks operating in various countries over the period 2000–2011, this paper investigates whether and how bank soundness is influenced by central bank independence, central bank involvement in prudential regulation, and supervisory unification. We find that central bank independence exercises a positive impact on bank soundness, which in the case of smaller banks is enhanced during the crisis. Supervisory unification and the central bank involvement appear to mitigate the adverse effects of the crisis. The power of the supervisory authorities and bank size also appear to be conditional factors.

The Effects of Central Bank Independence and Inflation Targeting On Macroeconomic Performance: Evidence from Natural Experiments

I investigate the effects of central bank independence and inflation targeting on macroeconomic performance in 26 advanced economies during the period 1980 to 2011. I find that both improve macroeconomic performance but inflation targeting is the more effective arrangement. When a central bank becomes more independent, it lowers the inflation rate and the variability of inflation but has no effect on real GDP or unemployment. When a central bank becomes an inflation targeter, it lowers the inflation rate, the variability of inflation, the variability of real GDP growth and the output gap, and has no effect on unemployment.

Fixed exchange rates, independent central banks and price stability in postcommunist countries: Conservatism and credibility

Central bank independence (CBI) and fixed exchange rates are used by governments to achieve stable prices. This article analyzes the mechanisms through which the two monetary institutions could work: Indirectly via a disciplinary effect on money growth rates or via an additional credibility effect on inflation expectations and the cost of capital. I further explain how both discipline and credibility are affected by the distinct flaws of independent central banks and fixed exchange rates: central banks lack transparency and fixed exchange rates take many shapes and are routinely devalued. The argument is tested with quarterly data from postcommunist countries for years 1991 to 2007. The findings show a strong disciplinary effect of monetary institutions on rates of M2 change and an effect on inflation controlling for money growth, but credibility does not extend to lower real short‐term market interest rates. Political institutions do condition the effect of central bank independence, while the types of fixed exchange rates affect money growth rates and inflation to different degrees.

The Effect of Central Bank Independence on Price Stability: The Case of Indonesia

This paper investigates the relationship between central bank independence (CBI) and inflation in Indonesia during 1970-2006. Using partial adjustment Ordinary Least Square (OLS) and Engel Granger Error Correction Model, the result shows that legal CBI index inversely affect the inflation, while the turnover of governor is not significant. This result emphasizes Bank Indonesia to strengthen its independency in order to achieve his inflation target. Keywords: Central bank independency, Inflation, Error Correction Model.JEL Classification : C32, E58